Big US banks press for redo on contentious capital rule

By Michelle Price and Pete Schroeder

WASHINGTON (Reuters) -The U.S. banking industry urged the Federal Reserve Tuesday to completely redo a contentious new rule to hike bank capital, while a senior Fed official aired support for starting over.

Comments on the "Basel Endgame" proposal were due on Tuesday, and the deadline led to bank industry groups peppering regulators with criticism, arguing that forcing them to set aside more capital to guard against potential losses was unjustified and could curb credit. Fed Governor Christopher Waller said he agreed the rule as proposed went too far and may need to be scrapped.

"It's got to have a major overhaul in my view to get a reasonable product ... it might even be best to just pull it back and then work on this and put it back out at a later date," he said at an event hosted by the Brookings Institution.

Waller voted against the original proposal when it was unveiled in July citing concerns, but the Fed typically strives to minimize internal divisions and Fed Chairman Jerome Powell has said the final rule needs the board's "broad support."

The comment deadline offers banks a key opportunity to try to reshape the Basel rule, which they have been fiercely fighting with lobbying and public advertising and media campaigns.

In a 314-page letter filed jointly by the American Bankers Association and Bank Policy Institute, the banking industry warned if finalized as written, the rule would have a "profound effect" on the availability and cost of credit, and complained it lacked sufficient analysis to justify significant capital hikes.

"This proposal is unworkable in its current form and needs to be withdrawn," said Rob Nichols, president and CEO of the American Bankers Association.

While it is rare for the Fed to redo a rule-writing effort, it is not unprecedented. A Fed spokesperson declined to comment. The central bank's vice chair for supervision and the rule's key architect Michael Barr has said last year's banking crisis shows extra capital is necessary to guard against unforeseen shocks.

The rule, first unveiled in July, recalibrates how banks calculate how much cash they must set aside to cover risks.

Banks say it is unnecessary since the industry is already awash with capital, and is so onerous it will hurt products and services from green lending and pension plan services to commodities hedging and Treasury market liquidity.

"I very much hope that it is ... completely revised," Citigroup Chief Executive Jane Fraser told reporters during an earnings call on Friday, adding it would hurt U.S. bank competitiveness and push lending into shadow banks.

In an unusual move, bank groups representing Citi, JPMorgan Chase & Co and Bank of America, among others, got ahead of the deadline, on Friday warning the Fed in a public letter that, if finalized, the rule would violate federal laws because it fails to justify why the changes are necessary.

“The agencies have not made the case for this proposal or considered its substantial impacts," said Kevin Fromer, CEO of the Financial Services Forum, on Tuesday. The group, which represents the CEOs of the largest eight U.S. banks, signed the Friday letter.

Also speaking to reporters on Friday, JPMorgan Chief Financial Officer Jeremy Barnum said litigation "can't be taken off the table when you're talking about something of this seriousness," but that it was not the preferred route.

Barr has said the rule's effect on borrowing would be limited and U.S. banks have been more competitive than European banks, despite having more capital. Last week he also said the Fed is taking feedback into account and considering fixes.

(Reporting by Michelle Price; Additional reporting by Douglas Gillison and Manya Saini; Editing by Andrea Ricci, Alexandra Hudson and Nick Zieminski)